Ennis, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended August 31, 2015; filed September 29, 2015. Unaudited. Unless otherwise stated, amounts below are in U.S. dollars and millions.
Business context
Ennis manufactures printed business products through its Print segment and activewear through its Apparel segment. For the quarter, Print represented 67% of sales and Apparel 33%. The filing describes a contracting, price-competitive traditional forms market and a highly competitive, globally exposed apparel market.
Financial performance and liquidity
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $150.8 | $151.8 | $301.3 | $293.0 |
| Gross profit / margin | $40.6 / 26.9% | $38.2 / 25.1% | $78.2 / 25.9% | $73.6 / 25.1% |
| Operating income / margin | $17.2 / 11.4% | $16.4 / 10.7% | $32.1 / 10.6% | $30.0 / 10.2% |
| Net earnings | $11.0 | $10.0 | $20.2 | $18.0 |
| Diluted EPS | $0.43 | $0.39 | $0.79 | $0.69 |
- Segment trends: Quarterly Print sales rose 2.7% to $100.5 million; Apparel sales fell 6.9% to $50.3 million. For six months, Print sales rose 5.9% to $197.2 million and Apparel sales declined 2.5% to $104.1 million.
- Margins: Quarterly Print gross margin edged up to 31.2% from 31.1%; Apparel rose to 18.4% from 14.3%. For six months, Print was 31.1% versus 30.8%, and Apparel 16.2% versus 15.1%.
- Cash flow: Six-month operating cash flow was $60.7 million, compared with $32.3 million. The increase was driven substantially by inventory-related cash generation ($21.7 million versus $5.7 million) and prepaid expense changes. Investing used $2.8 million; financing used $52.5 million, including $43.5 million of debt repayment and $9.0 million of dividends. Cash increased to $18.9 million from $15.3 million at fiscal year-end.
- Balance sheet and debt: At August 31, cash was $18.9 million, working capital $148.4 million, and current ratio 4.3:1. Long-term revolving debt was $63.0 million, down from $106.5 million at February 28. The $150 million facility had $84.2 million available after borrowings and letters of credit; the company reported covenant compliance. A lender had committed to extend facility maturity to September 18, 2017, on the same terms.
- Other metrics: SG&A increased to $23.4 million in the quarter and $46.1 million for six months, primarily due to acquisitions. The quarterly and six-month effective tax rate was 37%. Dividends were $0.175 per share quarterly, or $0.35 for six months.
Material changes versus prior comparable periods
- Quarterly sales slipped 0.7%, while six-month sales increased 2.8%; acquired Print operations supported growth, partly offset by organic Print attrition and weaker Apparel sales.
- Net earnings increased 10.3% for the quarter and 12.0% for the six-month period. Management attributed improved profitability to higher gross margins, acquisition contributions, and better Apparel manufacturing performance.
- Apparel gross margin improved with lower cotton and other input costs, improved manufacturing efficiencies, more production of core products, and fewer raw-material and fabric-production issues. Management cautioned that sales remain pressured.
- Debt fell by $43.5 million during the six months. Working capital decreased $27.9 million from February 28, primarily reflecting a $23.0 million reduction in inventory and a $3.2 million reduction in prepaid expenses.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance is provided. Management expects sufficient operating cash flow and credit availability to fund foreseeable operating and capital needs. Current-year capital expenditures, excluding acquisitions, are expected to be $4–$5 million; $2.5 million had been spent by August 31.
- Management expects a $2–$3 million pension contribution in fiscal 2016, although the minimum required contribution for the plan year is zero. The balance sheet reported an $11.0 million unfunded pension liability.
- Key risks include secular substitution of printed documents by digital alternatives; paper-price volatility and ability to pass through cost increases; distributor consolidation; apparel demand and pricing pressure, foreign competition and possible trade-policy changes; cotton/input-cost volatility; and dependence on limited suppliers. One supplier provided 41% of cotton and yarn purchases during the period.
- The revolving facility is variable-rate debt; a one-percentage-point rate change would affect annual results by approximately $0.6 million. Management estimated a 10% strengthening of the U.S. dollar against currency exposures would reduce fair value and results by approximately $0.3 million.
- Kay Toledo and Special Service Partners, acquired in December 2014, contributed $6.6 million of sales and $1.0 million of pretax earnings in the quarter, and $12.8 million of sales and $1.9 million of pretax earnings for six months. Ennis also acquired CMC Group assets for $0.3 million cash in July 2015; management deemed it immaterial. A prior-year $55.9 million Apparel-segment goodwill impairment is disclosed; no current-period impairment was reported.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material pending legal proceedings or material changes to previously disclosed risk factors were reported. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether improved Apparel margins and lower input costs persist despite continuing sales weakness and competitive pricing.
- How much Print growth reflects acquisitions versus underlying performance, including the effect of ongoing attrition at existing locations and acquisition integration costs.
- Whether inventory-driven operating cash flow is repeatable, and whether inventory levels remain appropriate as demand changes.
- The status and final terms of the credit-facility maturity extension, covenant headroom, and ability to sustain debt reduction while paying dividends and funding pension contributions.
- Exposure to supplier concentration, uninsured cash balances (reported at $15.6 million), foreign exchange, and possible future impairment of Apparel goodwill or other assets.